Introduction: Interpreting that capital gains far exceed labor gains!
The China International Economic Exchange Center held the first “World Economic Quarterly Talk” on August 18, 2016 from 9:00 am to 12:00 pm in the multifunctional hall on the first floor of the China International Economic Exchange Center. The theme of this session is “Tracking the World Economic Situation in the First Half of 2016- Will there be Major Historical Changes in the World Economic Pattern
Core viewpoint fast reading:
- The various innovations we refer to now are not higher-level technological revolutions, but rather the diffusion of mainstream industrial technologies; The true technological revolution has not yet been seen;
- The financial crisis, the global concern about high leverage, and the fear of rapid deleveraging;
- The biggest problem in the world for 300 years is that labor income cannot keep up with capital income;
- If the United States no longer acts as the world’s police, China, as a major power, will find it difficult to avoid its global responsibilities.
The full text of the on-site speech by Cao Yuanzheng, Chief Economist of Bank of China
Thank you. I am very pleased to come to the International Economic Exchange Center to discuss. Financial professionals tend to place greater emphasis on risk issues, and there is a challenging question: how do they view globalization? My opinion is slightly different from that of Pei Changhong and Zhao Jinping. I believe that globalization is facing enormous challenges, and I dare not say that it is a change not seen in 500 years, at least not seen in 65 years.
I would like to discuss two or three questions:
Firstly, what are the manifestations of globalization and deglobalization?
Secondly, what is the essence behind this performance?
Thirdly, how should we respond in this regard?
This round of globalization has two most important characteristics since the end of the Cold War. Due to the end of the Cold War and the adoption of a market economy system for global institutional consistency, transaction costs were greatly reduced. We see a phenomenon where economic growth is fast, with international trade growing at a rate more than twice as fast as economic growth. At the same time, the development speed of international finance is faster than the growth speed of international trade. In the past, when describing economic globalization, we usually referred to it as international financial integration.
Secondly, due to the end of the Cold War and the opening of global markets, there was a global allocation of productivity. At this time, it was not vertical or horizontal division of labor, but rather a global allocation of productivity, which became what people call a production chain lying horizontally among countries around the world, with the emergence of value chains and supply chains. In fact, China’s economic growth is highly related to this. When we talk about an open strategy with both ends outside, it does not mean that the market is outside, raw materials are outside, and processing is inside. This increases the tradability of international trade.
In this situation, the global economy is growing rapidly, which is a story after the 1990s, forming a new pattern where three sectors are connected.
Firstly, developed countries such as Europe and America have inadequate industrial competitiveness. At this time, they are developing the service industry, which covers the whole world.
Secondly, emerging economies in Asia, represented by China, with manufacturing as their leader, have incorporated cheap labor, especially cheap labor, into the process of globalization, resulting in cheap manufacturing and product dumping worldwide. China has become the world’s factory and accumulated huge foreign exchange reserves.
Thirdly, due to exports to the outside world and large imports from European and American countries, the industrial development in Asia has led to a demand for resources and energy in the region, thereby driving economic growth in resource exporting countries. There is a phenomenon where resource prices are soaring and investment in resources is increasing. These countries export to Asian countries and also obtain huge foreign exchange reserves, but they will find significant problems in their international balance of payments. European and American countries are basically in deficit under the current account, while developing countries are in surplus under the current account, which is a global imbalance problem. The surplus of these developing countries is then placed in the United States and invested in the US financial market, which supports the debt of American residents, thus sustaining the global economy and forming high-speed growth.
What is a financial crisis? It is this’ cyclical phase ‘that has led to the difficulties currently faced globally.
In the past, we thought that this difficulty might be caused by a large surplus or deficit in the current account, or the impact of imbalances in the current account. However, after the 1980s, we will find that the situation of surplus and deficit in the current account has undergone significant changes. In 2007, China’s current account surplus accounted for nearly 10% of GDP, but now it is less than 2%. According to the requirement of a current account surplus of 4% of GDP in 2008, China would have completed it long ago. The trade deficit of the United States is also shrinking, but the global economy has not improved as a result. The result we have obtained is that the growth rate of global trade has been lower than that of GDP for five consecutive years.
The growth rate of trade supports the economy, trade, and finance. Without the skin, the hair cannot be attached. Therefore, financial turmoil has become a very important fact, and the world is in a state of financial turmoil.
In the past, when discussing issues, we talked about the imbalance caused by the surplus under the current account. Now, what we see is the even greater imbalance caused by the surplus and deficit under the capital account, which is the issue of international capital flows that you just discussed. And this flow trend is basically from developing countries to developed countries. People say that Brexit has intensified this flow, resulting in a one-way appreciation of the US dollar and depreciation of other currencies, posing greater risks. In this situation, if the growth rate of trade cannot keep up with the growth rate of the economy, protectionism will rise. The WTO negotiations have come to an end under certain circumstances since last year, as the Doha Round cannot be closed and has been replaced by regional initiatives such as TPP and TTIP. We have also observed that as international financial turbulence continues, countries are discussing whether to close their capital accounts and whether to regulate the intermediate capital account in international payments. These are different from some past facts, as if globalization is in the process of going.
The second question, we note that its most important essence is economic growth, or that the global economy is facing a new technological revolution, or is at the forefront of a new technological revolution.
Observe the total factor productivity. After the crisis, total factor production is declining. In both developed and developing countries, although people talk about various technologies of “Internet plus”, it does not seem to have effectively improved total factor productivity. If we look at it from this perspective, we believe that globalization in the past was the diffusion of mainstream industrial technologies from changes in systems and mechanisms to developing countries. At the same technological level, because of lower production costs and more acceptable technologies in developing countries, products quickly became the center of global manufacturing. But there has not been a revolution like the internal combustion engine or steam engine. It is not a higher technological revolution, but rather the diffusion of mainstream industrial technology, resulting in global overcapacity. So it’s just about whose cost is lower, but it doesn’t increase the overall demand.
So we are asking a question, where do we need a new technological revolution?
I think if we look back at the technological revolutions of the past, the most important characteristic was speed. What was the steam engine? Steam engine replaces carriage with train, what is internal combustion engine? Airplanes replace ground transportation.
However, if you look at the future technological revolution, there will rarely be a breakthrough in speed, which is the highly regarded “outer space technology” in our financial industry. Nowadays, the so-called “rocket recovery technology” is a technology favored by global investors because it is a “escape from Earth” technology. Including the “capsule train” invented in the United States, which can reach a speed of 1000 kilometers per hour. The implicit expectation here is that we need to make breakthroughs in technology and speed. Let’s take a look at all the industrial revolutions, and we believe that if the major breakthroughs in industrial technology are ultimately technological, driven by changes in industrial processes that bring about changes in social production and lifestyle, we may be in a period where we have not yet seen industrial technology become mainstream.
I think the problem of Internet information transmission speed does not solve the problem of physical mobile speed. If we say that industrialization is more important, it is the speed at which objects move. Furthermore, precisely because of such a situation, when technology cannot advance and production capacity is rapidly increasing, according to the Keynesian approach, it is to expand effective demand. How to expand effective demand? Creating demand with new investments and new objects results in high financial debt. Without exception, the world has entered a state of high debt, with huge fiscal deficits and massive liabilities, which is an undeniable fact.
Since the end of World War II, Japan has reached 250% of GDP, the United States has exceeded 100%, and Germany is over 80%. From this perspective, it seems that the Chinese government is the best. According to the EU standards of that year, the debt of a country cannot exceed 60% of GDP, which only the Chinese government can meet. High debt has become a big problem, what is a financial crisis? The financial crisis is a rapid deleveraging, and high debt is high leverage. In such a highly leveraged situation, the world is concerned about whether new problems may arise. The United States wants to stimulate again, but found that there may be problems with getting it up, so they dare not press the gas pedal too much. They stepped on the gas pedal and quickly retracted it. Now they are facing difficulties again.
If debt is not pushed up and there is no new technological revolution, global demand will definitely be shrinking. In April and May of this year, we discussed global economic issues at the European Central Bank. As a bank, we don’t understand what negative interest rates are and how to operate them. Negative interest rates mean that I have to charge interest back when depositing money in the bank, and if you want to borrow money from the bank, I have to pay you. Even so, the demand policy has achieved this goal, but the global economic growth rate has not increased. Supply side structural reform is actually needed globally, and Keynesian policies have almost come to an end. At this time, globalization is facing significant challenges. We say it is not just a structural issue, not just a cyclical issue, but more importantly, humanity is considering the future direction towards major challenges. Why is it said that there may be changes that have not been seen in 500 years, or at least 65 years. The entire economic policy framework is undergoing significant changes. This is probably why the United States has raised the 1-on-99 question among academic trends worldwide.
In this situation, a process we call fragmentation is emerging globally. I don’t want to use the concept of fragmentation as I mentioned. Look at the strategic partnership established between China and Russia, the three agreements signed by President Putin in China last month, and the fragmentation and instability of the global economy. What does this fragmentation form?
Just now Zhao Jinping talked about Brexit in the UK, and we think he said it very well and correctly. But the risks we see, such as Brexit, are predictable and controllable. We think the greater risk is the coup in Türkiye, which is a failure, which means that the whole Islamic country, the most secular country, has started Islamic culture and Muslimization. This is the biggest threat to Europe, and the biggest threat to the world.
The biggest problem in the world for 300 years is that labor income cannot keep up with capital income. From this perspective, the reasons behind the emergence of Sanders may be a major challenge to globalization. In addition, the ideological roots behind the rising geopolitical risks, we say, may be the background of the changes we haven’t seen in decades or even 500 years. So, our understanding and perception of the world are changing.
Discussing China. I particularly agree with Professor Pei Changhong’s “the Belt and Road”, including Zhao Jinping’s “the Belt and Road”, which is a new concept. The core of the “the Belt and Road” is inclusiveness, and then a community of shared future. This is different from the rules of globalization in the past. In the past, business competition was talked about, and competitors won. Now it is called co construction, sharing, and win-win. This is an inclusiveness.
If there is a second half of globalization, this is it. However, if this concept is to construct a new globalization, we also know that the challenges are enormous, and it is a reconstruction of the understanding of the entire world. This is a major challenge to the world governance system, governance philosophy, and governance rules. If you cannot overcome this challenge, it is obvious to establish a new globalization, and we see that the old globalization is fragmented. We believe that the world is currently in the Spring and Autumn Period and Warring States Period, and the biggest risk is likely to be a risk. What would the world be like if the United States no longer acted as the world’s policeman and regained its glorious independence.
Trump, Hillary, and Sanders represent this ideology, which has existed in American history. China may have to take on more international responsibilities, especially in neighboring countries, and should establish a basic framework. We believe that the China ASEAN “10+1” and China Shanghai Cooperation Organization, as well as regional arrangements in the surrounding areas, including the China Japan South Korea Free Trade Area, may be the most important institutional frameworks. If we cannot play an important role in the world yet, at least we need to play an important role in the affairs of the surrounding areas. I think this is an unavoidable issue for China to come this far.